1. What is Compound Interest?

Compound interest is the interest calculated on the initial principal and also on the accumulated interest of previous periods. It allows savings to grow at an accelerating rate over time, making it a powerful tool for long-term wealth accumulation.

2. How Does the Calculator Work?

The calculator uses the compound interest formula:

Where:

• \( FV \) — Future Value ($)
• \( P \) — Principal amount ($)
• \( r \) — Annual interest rate (decimal)
• \( t \) — Time in years

Explanation: The formula calculates how much your initial investment will grow when interest is compounded monthly over a specified period.

3. Importance of Compound Interest

Details: Understanding compound interest is crucial for financial planning. It demonstrates how regular savings can significantly grow over time, helping individuals make informed decisions about investments and retirement planning.

4. Using the Calculator

Tips: Enter the principal amount in dollars, annual interest rate as a percentage (e.g., 5 for 5%), and time in years. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between simple and compound interest?
A: Simple interest is calculated only on the principal amount, while compound interest is calculated on both the principal and accumulated interest.

Q2: How often is interest typically compounded in savings accounts?
A: Most savings accounts compound interest daily or monthly, though this calculator uses monthly compounding.

Q3: Does compound interest work the same for debts?
A: Yes, compound interest applies to debts as well, which is why credit card debt can grow quickly if not paid off.

Q4: What is the Rule of 72?
A: The Rule of 72 is a quick way to estimate how long it takes for an investment to double: 72 divided by the interest rate.

Q5: How can I maximize compound interest benefits?
A: Start investing early, contribute regularly, and reinvest your earnings to take full advantage of compounding.